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bubble
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What Happened at Enron, WorldCom and Arthur Andersen and What Part Was Play by Technology in the Deception? Before we start analysis the case of Enron, WorldCom, and Arthur Andersen, let us understand the term “Bubbleology”. “Bubbleology” is a term coined by Kevin Hassett that describes the all-too-common stock market roller coaster ride. A ride that, for a while, seems destined to never end, only later to tumble miserably off the unfinished track. History is no stranger to bubbles. The earliest report of such phenomena, for instance, occurred in the early seventeenth century, at the height of the Dutch Tulip Mania. The popularity of tulips grew so much that people began abandoning their jobs and squandering their life savings to grow them. Eventually, they became such a marketable product that they were traded publicly, as investments, in what was known as the Dutch Tulip Bulb Exchange (Tarses). One Dutchman was even reported to have paid “two wagon loads of wheat, four loads of rye, four fat oxen, eight fat swine, twelve fat sheep, two hogsheads of wine, four barrels of beer, two barrels of butter, 1,000 pounds of cheese, a marriage bed with linens, and a sizable wagon to haul it away,” for one tulip -- a transaction not unlike many others at the time (Tarses). Warnings ignored, the value of tulips began to inflate at a remarkable rate. Concerned, the Dutch government issued a decree on April 27, 1637, that declared tulips and tulip bulbs products, not investments, and that they had to be bought and sold on that basis (Tarses). With no new money coming into the market to further inflate the bubble, and with banks calling in their tulip loans, tulip prices collapsed overnight and the bubble burst. Although we might find the Tulip Mania humorous, recent history has seen similar devastation. In an alarming course of events in 1907, the entire New York Banking Institution collapsed. At that time, and in many cases today, banks did not maintain as much cash as their account holder’s had deposited (Moen). Solvency refers to the relationship between assets and liabilities. If an institution has more liabilities than assets, it is referred to as insolvent. In 1907, there was widespread fear that banks were insolvent, leading to massive, simultaneous withdrawals, eventually causing New York banks to run out of money (Moen). Getting one’s money literally became a first-come first-serve situation. The effects of the New York banking panic were widespread. Call money on the New York Stock Exchange (NYSE) was nearly unobtainable (Moen). Call money was money lent for the purchase of stock equity, with the stock itself serving as collateral for the loan. The lack of Call Money later led to the New York Clearing House issuing loan certificates as an artificial way to increase the supply of currency available to the public. This later lead to the Federal Reserve System we employ today (Moen). Perhaps one of the most notable and significant bubbles in history was the boom of the 1920’s. After World War I, growth in technology such as automobiles, radios, and the increased availability of electricity fostered a flourishing market (Smant). Facilitated by the increased usage of installment credit, a short recession in 1927 ended and industrial production jumped 25% causing the NYSE to reach 381 points, compared to 100 in 1926 (Smant).
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Paper Information
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Title: bubble
Words: 2699
Rating: None
Pages: 10.8
submitted by: jchung
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